Emergency fund

An emergency fund consists of cash assets held in savings accounts, checking accounts, money market accounts, or CDs for the purpose of meeting unexpected expenses. How much of an emergency fund you should maintain varies depending on a variety of factors including the amount of your income and the stability of that income. Having more reserve assets than necessary can deprive you of the opportunity to earn a substantial rate of return on your liquid assets, while having an inadequate amount of cash reserves can subject you to the risk of having a cash shortage should an unexpected emergency event arise.

On one end of the spectrum is an individual or family with steady, predictable income. A family in this situation could likely survive with an emergency fund consisting of three months living expenses. On the other end of the spectrum is an individual or family which relies on business or self employment income. Such a family would likely require a much larger emergency fund, consisting of as much as twelve months of living expenses.

It is also important to perform a risk analysis to determine the likelihood of an emergency event occurring and the risk management systems in place to plan for the possibility of such events occurring. This includes analyzing existing insurance coverage with respect to coverage amounts as well as deductibles, as well as cash reserves held in vehicles such as health savings accounts. For example, individuals or families who self insure will need to maintain a higher cash reserve in an emergency fund than those individuals or families who maintain a substantial amount of insurance. Similarly, having insurance coverage with high deductibles will necessitate having sufficient cash reserves to pay those deductibles should a claim arise.